LANDM - Gladstone Land: Results Were Okay Valuation Improving But Still Too High

• Gladstone Land's financial performance was significantly worse than in the previous quarter, but this was due to the timing of payments and not problems with the company.
• The company is positioned for forward growth in the third quarter due to a few rent increases and newly acquired properties.
• The company continues its long track record of steady distribution growth but its coverage is quite tight.
• Gladstone Land still appears overvalued despite the steep stock price decline over the past few months.

On Tuesday, August 9, 2022, farmland-based real estate investment trust Gladstone Land Corporation ( LAND ) announced its second quarter 2022 earnings results. At first glance, these results were quite disappointing as Gladstone Land missed the expectations of its analysts in terms of both revenues and profits. The company has certainly not seen its stock price perform especially well lately as it has declined quite precipitously over the past three months. This may not necessarily be a bad thing though since, as I have pointed out in the past, Gladstone Land has been substantially overpriced for a significant amount of time and this price decline helps to improve the stock's valuation by quite a lot. Admittedly though, the current price is still much higher than I really want to see. The company also continued its long streak of increasing its distributions every quarter, although even with the increase the 2.10% yield remains well below the level that I really like to see from a real estate investment trust.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article and serve as a framework for the resultant analysis. Therefore, here are the highlights from Gladstone Land Corporation's second quarter 2022 earnings results:

• Gladstone Land reported total revenues of $20.293 million in the second quarter of 2022. This represents a slight 1.76% increase over the $19.943 million that the company reported in the previous quarter.
• The company reported total funds from operations of $4.819 million in the reporting period. This compares poorly to the $6.620 million that the company had in the first quarter.
• Gladstone Land acquired one property in California and another small parcel in Florida that expanded one of its existing properties. The purchase price of these properties was $24.6 million.
• The company had a net asset value of $15.60 per share at the close of the quarter, which is a $0.06 increase from the first quarter.
• Gladstone Land reported a net income of $613,000 during the second quarter of 2022. This represents a substantial 48.36% decline over the $1.187 million that the company reported in the first quarter of 2022.

It seems quite certain that the first thing that anyone reviewing these highlights will notice is that Gladstone Land suffered a decline in every measure of financial performance compared to the first quarter of the year. This is despite the fact that the company had fully 100% of its properties occupied during both quarters. Gladstone Land is historically quite consistent with this, which is something that nearly all real estate companies strive to accomplish. The big reason for the declines that we see in many measures of the company's performance is that various accounting issues boosted its performance during the first quarter. In that quarter, Gladstone Land received $2.8 million of interest patronage that artificially boosted its results. As the company did not receive that money in the second quarter, its results are much closer to what it will normally generate.

One of the advantages of real estate companies is that they typically enjoy remarkably stable cash flows. After all, renters tend to pay relatively the same amount of rent each month. They also enjoy growth as well since leases typically call for annual rent increases. Gladstone Land managed to secure one of these during the quarter. At some point during the period, Gladstone Land got a rent increase that should boost the company's rent by $170,000 annually. We saw the impact of this to a small degree during the second quarter but we will see a much larger increase during the third quarter. This is because the company only received this higher amount of money for a limited part of the second quarter but it will receive this higher amount for each of the three months during the third quarter.

Gladstone Land will likely see more growth during the third quarter from other sources. The biggest source was that the company purchased new farms during the quarter. As stated in the highlights, the company acquired one 1,374-acre property in California. It also acquired fifteen acres in Florida, which it was able to use to expand one of its other properties in the state. As might be expected, this should increase the company's revenues since after all, it should be able to lease this property out to others and thus generate revenues. It is always important to ensure that the company did not overpay for the property, however. One of the ways that we can determine this is to have a look at the capitalization rate, which is used in the real estate industry to express the return that the purchaser of a given property can expect from that property. In this case, Gladstone Land has projected a capitalization rate of 5.84% but expects that this rate will increase over time. This is not a bad rate, especially in California. After all, we have seen the company frequently receive much lower capitalization rates from its California-based properties. This farm is an olive orchard so it fits in well with the company's strategy of purchasing farms growing permanent crops such as bushes, orchards, trees, and vines:

As was the case with the company's lease increases, we will see the biggest benefit from this acquisition during the third quarter of the year. This is because Gladstone Land acquired this property in June so its ability to generate any rent from it was highly limited. This will not be the case in the third quarter, however. Thus, we should see this purchase boost the company's rental revenue going forward.

As mentioned in the introduction, Gladstone Land once again increased its distribution, which is fairly typical for the company. The increase was admittedly a fairly mild one as the increase was only 0.22% to $0.1362 per share quarterly. However, Gladstone Land actually pays its distribution quarterly. This is something that is quite nice for those people that reinvest their distributions since it allows for much more rapid compounding. As is always the case though, we want to ensure that the company can actually afford the distribution that it pays out. After all, we do not want the company to be forced to reverse court and cut the distribution since that would reduce our incomes and probably cause the stock price to decline. In the case of a real estate investment trust, the common way that we judge this is by looking at its funds from options, which is analogous to the operating cash flow used by other companies in other industries. As stated in the highlights, Gladstone Land generated funds from operations of $4.819 million in the current quarter. This works out to $0.139 per outstanding share, which is slightly more than the declared distribution. As we can see then, Gladstone Land does appear able to carry its distribution, but the coverage is a bit tighter than we really like to see. Overall though, the distribution is probably reasonably safe.

It is always critical that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a surefire way to generate a suboptimal return on that asset. In the case of a real estate investment trust like Gladstone Land, we can value it by looking at its net asset value. Net asset value is usually used to value a closed-end fund, referring to the value of the fund's assets minus any outstanding debt. It does work in this case, however, because a real estate investment trust is basically a portfolio of real estate as opposed to stocks or bonds. Unfortunately, we can see here that the company appears to be substantially overvalued despite the recent price decline. As of June 30, 2022, the company had a net asset value of $15.60 per share but actually sells for $25.71 today. This means that the business is currently selling at a 64.81% premium to net asset value, which is a pretty high price to pay. It may therefore make some sense to see if the stock continues to decline further before buying.

Overall, Gladstone Land's reported second-quarter results were admittedly not impressive when compared to the previous quarter. However, there does not appear to be much to worry about here since the biggest reason for this was simply the timing of when certain payments were received and not due to any problem with the company itself. The firm continues to exhibit the historical steady growth that we have come to expect from it as acquisitions and increased rental prices happened during this quarter as usual. The continued track record of distribution increases also was nice to see. The only potential point of concern here is that Gladstone Land continues to be overpriced despite the sharp decline that it has suffered over the past few months.

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